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What Makes More Sense Right Now?


Real estate investing strategies have always been a topic of debate, with investors considering various strategies to maximize their returns, save on taxes, and accommodate various lifestyle preferences.

Landlording is, of course, the most popular route for investors, but don’t sleep on private lending. In today’s real estate market, with lower inventory and transaction volume, active investors are starting to look at more passive income-generating solutions to replace some of their current investment strategies, such as flipping and owning rentals

Why the shift? With fewer good deals on the market, coupled with lower profit margins, reduced depreciation benefits, and longer appreciation realization, real estate investors are finding that private money lending could be more advantageous in today’s stagnated market compared to previous years. Here’s a look at the financial considerations of each strategy.

Private Lending: The Power of Being the Bank

Private lending involves lending your capital, and perhaps some capital from within your network, to other real estate investors or borrowers in exchange for a fixed interest rate. When considering this approach, it’s essential to calculate the potential returns and compare them to traditional buy-and-hold investing as a landlord. 

Let’s delve into the financial benefits of private lending:

  • Compounding returns: If you’re lending your funds at an interest rate of 12%, your investment is poised to double in approximately six years. This means with taxes factored in, you can expect your initial investment to double in 7-7.5 years.
  • Wealth accumulation: Instead of using your capital as a 20% down payment for a long-term rental property, you could lend it out at a 12% interest rate, effectively putting 100% of your capital to work. Over time, your wealth accumulation through private lending outpaces the gains from the amortization process as a landlord.
  • More passive investment: Being a landlord comes with a host of responsibilities, even if you work with a property manager, from dealing with maintenance and repairs to handling tenant issues and turnover. Private lending allows you to avoid these landlord headaches, giving you peace of mind and more free time.
  • Capital liquidity: Private lending keeps your money more liquid in the way CDs do. You won’t need to take out a loan against your property’s equity or pay interest to access your own capital. This liquidity can be liberating, especially when you’re considering your financial flexibility.

Buy-and-Hold Investing: The Well Trodden Path

While private lending has its advantages, it’s important to consider the unique aspects and challenges of being a landlord:

  • Appreciation: Property appreciation can be speculative and inconsistent. Some investors may realize substantial appreciation, while others experience minimal growth. Recent trends emphasize cash flow over appreciation, making the latter less reliable, and where we are at currently in today’s market cycle, it will take a much longer time to realize double-digit appreciation in some market and asset classes than in the previous decade.
  • Property management: As a landlord, you’ll have to handle various property management tasks, from leaky toilets to evictions. In addition to the time and effort required to resolve these issues, it also requires additional capital. If you experience multiple turnovers or evictions, or even large capital expenditures, before you can build up cash reserves, you could find yourself shelling out more capital than you anticipated.
  • Equity and leverage: The paradox of equity is worth noting. Some investors, in their pursuit of leverage, prefer having as little equity in their property as possible. This approach allows them to access their capital through loans. Private lending gives you the flexibility of having your money at your disposal without paying interest to access it.

Final Thoughts

Both private lending and being a landlord have their merits and drawbacks. The decision between the two depends on your financial goals, risk tolerance, and lifestyle preferences. 

Private lending can provide a steady source of passive income, faster wealth accumulation, and fewer landlord hassles. However, it doesn’t offer the depreciation or tax deferral benefits owning rentals does. Additionally, being a landlord offers the potential for property appreciation and the chance to build equity, albeit not with the rapid increases we’ve experienced in the last five to 10 years. 

Ultimately, your choice should align with your investment strategy and personal preferences. As you consider your options, remember that financial freedom and success can be achieved through various paths in the world of real estate investing.

All the cash flow, none of the hassle

Learn how to create financial freedom and passive income in real estate as a private money lender. Lend to Live makes passive income through private lending achievable for anyone.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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